Abstract:

The decision to pay out earnings or retain dividends has been a subject of debate for many scholars. The effect of dividend on the firm value and cost of capital have been covered in attempt to resolve the dividend puzzle. This research paper tests the applicability of constant dividend model by companies listed at the Nairobi stock exchange. Data was collected from annual reports and share price schedules obtained from Nairobi stock exchange and Capital market Authority for a population of 20 companies that paid dividends consistently from 2002 to 2008. The data was then analyzed by re-computing the dividends that should have been paid if the dividend constant model was applied. This recomputed figure was later compared to the dividend as paid out by the companies thought the years of study. Paired sample t-test statistic was also performed to determine whether there is a significant difference between the two dividend figures. The findings of the research established that the dividend model was not employed by the companies listed at the Nairobi stock exchange. Most firms instead adopted stable and predictable policy where a specific amount of dividend per share each year was paid periodically. In some years there was a slight adjustment of the dividend paid after an increase in earnings, but only by a sustainable amount. The study shows that the relationship between the stock market prices and the dividend paid from the constant dividend model is uneven from one year to another and where there was a relationship it was insignificant. Though a share would be highly priced, a high dividend per share was not always declared.